Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Activision Is Music to My Ears

Air guitar is dead. All hail the plastic guitar, and the profit it brings!

Yesterday was my birthday. What started as a simple surprise party -- pizza, hugs, gift certificates -- quickly degenerated into an all-out Guitar Hero extravaganza. Four hours later, my friends reluctantly rambled home (the unfortunate side effect of having a party on a Wednesday night), and I didn't feel old at all. I felt like a bleepin' rock star.

Meanwhile, 2,500 miles westward, Guitar Hero publisher Activision Blizzard(NASDAQ:ATVI) was holding the conference call for its fourth-quarter earnings report. And it’s becoming apparent that the music-game franchise has become the lifeblood of the world's largest video game business. There are millions of wannabe rockers like me who can't think of anything better to do on a certified special occasion than to geek out with a fake plastic instrument and a few friends.

Non-GAAP net revenue in the all-important holiday quarter was $2.3 billion, $100 million above management guidance. Non-GAAP operating income of $644 million filtered down to a pro forma net profit of $429 million, or $0.31 per diluted share. Comparing any of these numbers to the year-ago, pre-merger period is difficult, and really sort of pointless. Vivendi Games plus Activision equals a very different beast than the simple sum of its parts.

The company doesn't break out sales or profits by product line, but it was happy to announce that Guitar Hero III has passed the $1 billion sales mark. Guitar Hero: World Tour was the best-selling console game of the quarter, dollar for dollar. And Nintendo (OTC BB: NTDOY.PK) may rule the handheld sales charts in number of units shifted, but Guitar Hero: On Tour collected more money than any other handheld game in 2008.

See a pattern here? So do Vivendi-Blizzard's management, and the analysts following the company. In that conference call, the best-selling PC game franchise World of Warcaft was mentioned 15 times, and the equally successful Call Of Duty 20 times. Guitar Hero got 47 mentions, plus another nine for the upcoming Metallica expansion -- more than even "sales" (27 mentions).

And there's lots of room for this profitable franchise to grow further, beyond just releasing new titles. Europe has barely gotten started on this craze, so Activision Blizzard, Electronic Arts(NASDAQ:ERTS), and Viacom's (NYSE:VIA) MTV Games should have a field day selling Guitar Hero and Rock Band titles there.

Japan is another untapped market, though these rhythm games would need to push aside Konami(NYSE:KNM) and its massive Dance Dance Revolution and BeatMania franchises there.

Activision Blizzard will live and die with the Guitar Hero franchise. I believe that there's plenty of life left in this rocking property.